Alcoa earnings: Another bad quarter, but reason to hope

Amid dropping demand and falling prices, Alcoa just announced its second consecutive quarterly loss. At a drop of 59 cents per share, it did slightly worse than analyst predictions of between 52 and 58 cents per share. However, its revenues of $4.15 billion were significantly higher than the $4 billion that most analysts predicted.

Today's news, while undoubtedly painful, is hardly surprising. The aluminum giant has already embarked on what it refers to as a "Holistic program to re-position balance sheet and restore operational costs." Basically, this has translated into slashing costs, lowering the debt-to-capital ratio, reducing dividends, increasing cash on hand, and raising money with an equity and convertible notes offering.
Over the past few months, the news has been filled with a peculiar dance of dire pronouncements and optimistic hopes. Balanced against every-more-depressing tales of rising unemployment and falling stocks, the President's plans for infrastructure upgrades, tax relief, and other stimulus have managed to keep expectations high even as realities have seemed increasingly grim.

The tension between hopes and realities is particularly clear when one looks at Alcoa. On the "depressing reality" side of the ledger, the aluminum giant is dealing with a slow market. Aluminum reserves are high, demand is low, and the price has plummeted from a peak of $3,280 per ton in July 2008. Following a 50 percent drop in the second half of 2008 and a further nine percent drop in the first quarter of 2009, the price is currently hovering around $1,392. The revenue of $4.15 billion is almost a 50 percent drop from last year. What's more, even with various infrastructure and stimulus projects in the works, it seems likely that aluminum demand will continue to drop for the rest of 2009.

Alcoa's response to the declining market has been to cut costs, batten down the hatches, and wait out the recession. It has cut annual costs by $2.4 billion, made plans to reduce capital expenditures by a further $2 billion in 2010, and is set to improve its working capital by $800 million by the end of 2009. It has cut its quarterly stock dividend by almost 80 percent, from $0.17 to $0.03, which should yield $430 million, and it has announced plans to launch a public offering of common stock and convertible notes that have yielded roughly $1.4 billion.

On the "stimulus hopes" side of Alcoa's ledger, many analysts are looking forward to large building projects in the near future, hoping that these might increase the demand for aluminum. As vFinance Investment's William Lefkowitz notes, "Investors who believe that the worldwide economies are going to start to turn around are beginning to show signs of light at the end of the tunnel have begun buying shares of Alcoa." What's more, some analysts have noted that Alcoa's current low price makes it a great takeover target for BHP Billiton. Others have suggested that the drop in natural gas prices bodes well for the aluminum company, as energy is one of its major costs.

And so, as Alcoa moves past its depressing (if unsurprising) quarterly results, it is struggling with a grim present, even as it looks forward to a promising future. With stimulus in the air and hard realities on the ground, little wonder that the aluminum manufacturer, in the words of its old slogan, "can't wait for tomorrow."